Despite all the positive news about digital assets from the new administration, the crypto ecosystem is yet to be fully integrated with the US banking system. Even if we remove the “Operation Chalk Point 2.0” limit, institutions and individuals will not be able to access the money market at the level of efficiency that traditional Main Street can provide, let alone Wall Street.
This has created an opportunity for many native entities in crypto to use what they have – good collateral and borrow US dollars (USD) using that collateral. As a result, you have asset-backed loans, which can bring you more than “inherent.”
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If junk bonds spread below 300 basis points (BPS) than the US Treasury Department, BTC-backed loans could offer more yield than junk bonds with less risk than investment grade bonds . Using current market conditions and standard credit default modeling techniques, Blockfills estimates fair value between 150 and 200 bps over UST on BTC-backed loans, but is currently 400 and 600 bps at UST is traded at.
Loans backed by excessive BTC could provide a great opportunity for traditional financial institutions participating in large Crypto in a way that is reminiscent of previous innovations such as mortgages and junk bonds . These transactions can be made up of a Triparty arrangement. This is when two parties engage with a third party as reliable custodians of the funds held in escrow. This removes the need to detain ciphers, handle margin calls and address the sale of collateral under default conditions.
Participants and businesses in the crypto market simply have no full access to the USD banking system. These BTC-assisted loans are a possible solution to fill the gap. Collateral is excellent, tradeable and liquid in both onshore and offshore markets. This is a positive comparison with the default terms of a corporate loan that allows bankruptcy proceedings to last for years (or decades).
A portfolio of loans like this does not represent diversification as all of these loans are supported by cryptocurrencies. However, this means that the portfolio may be hedged using options* markets that are liquid in both the listed and OTC markets of BTC.
The BTC-backed loan market is an opportunity to bridge crypto and traditional finance. It is not intended to provide a “intake” return that can be used in a perfect position, but instead speaks of the types of investment parameters associated with a vocabulary that can be recognized by the Patagonia vest-wearing crowd. It is intended. Terms like “over-risk-adjusted returns” and “harvest premium” are reminiscent of the 80s and 90s.
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